Why Do Countries Float the Way They Float?

By Ricardo Hausmann, U. Panizza, Ernesto H. Stein. 2000

640 citations recorded by the source corpus.

Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different volatilities in the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or in interest rates. We document these differences and present a model that explains them as the optimal response of a Central Bank that attempts to minimize a standard loss function, in an environment in which firms are credit-constrained and incomplete markets limit their ability to avoid currency mismatches. This model suggests that the difference in the way countries float could be related to their differing levels of exchange rate pass-through and differences in their ability to avoid currency mismatches. We test these implications and find a very strong and robust relationship between the pattern of floating and the ability of a country to borrow internationally in its own currency. We find weaker and less robust evidence on the importance of pass-through to account for differences across countries with respect to their exchange rate/monetary management.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/56e2a7322ea5975614c3e29f5e91589b1da2c77b

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Citations in the corpus

The Mirage of Exchange Rate Regimes for Emerging Market Countries (2003, background): “Sound fiscal policies that make government defaults extremely unlikely are thus essential to getting interest rates to If traded goods are not derlorninated in the sarne foreign currency as the debt, then this in\ulation may be incornplete ullless the currency used for denominating debt mores r c n…”
Emerging market exchange rate exposure (2008, positive): “6 Studies that report foreign operations to be a significant determinant of exchange rate exposure include He and Ng (1998), and Jorion (1990). On the other hand, Dominguez and Tesar (2001) find that neither foreign sales nor multinational status is a significant determinant of exposure.”
Living with Flexible Exchange Rates: Issues and Recent Experience in Inflation Targeting Emerging Market Economies (2003, positive): “Hausmann et al (2000, 2001) try to measure the extent of currency mismatch by using three different definitions of the “ability to borrow” internationally in domestic currency.”
Capital Controls and the International Transmission of U.S. Money Shocks (2003, positive): “Several studies, including Aghion et al. (2000) and Hausmann et al. (2001), have stressed that foreign currency liabilities are an important explanation why countries with de jure floats may work hard to smooth exchange rate fluctuations.”
Government Bonds in Domestic and Foreign Currency : The Role of Institutional and Macroeconomic Factors (2007, positive): “…to borrow abroad in their domestic currency (even short term) and to borrow long term in domestic currency in the local market (Eichengreen and Hausmann 1999, Hausmann, Panizza, and Stein 2001, Eichengreen, Hausmann, and Panizza 2002, Chamon and Hausmann 2003, and Hausmann and Panizza 2003).”